THE Australian dollar has come under significant pressure during the past month.
The high-yield unit has dropped against fellow investment currencies (New Zealand and Canadian dollars) as well as safe havens (US dollar and Japanese yen).
The cross-market weakness -- especially during a period when risk appetite has risen through global equity markets -- speaks to an individual weakness.
But what is so disconcerting in the Aussie's outlook that it overrides the natural inclination of investors to chase yield?
Our first inclination is to look at interest rate forecasts.
While the currency may offer the highest benchmark rate of the majors, if that yield is expected to drop its appeal diminishes as the return expected shrinks.
Until the Reserve Bank delivered its monetary policy bearings last week, the forecast for further interest rate cuts was easing steadily. This normally would have encouraged a climb for the Aussie dollar; but instead we were faced with the steady decline.
A few months ago, the International Monetary Fund announced it was reviewing the Australian dollar for inclusion into the ranks of reserve currency status -- a move that was behind the market. Central banks and investors the world over were already buying Aussie bonds for the exceptional yield, AAA-rating and connection to China's growth.
This combination of strong return and relative safety was the perfect combination, particularly for investors pulling their funds out of a crisis-plagued eurozone and found a resistant Switzerland or near-zero rate in the US.
This redirected flow continued as the financial media projected the worst-case scenarios for the euro area and European market rates closed in on zero. However, conditions have changed materially in recent months.
Fears of a eurozone breakup dissipated and investors started to refer to the region's assets as cheap compared with their long-term potential.
Naturally, the capital that fled to Australia for safety and yield -- especially the funds of European investors -- started to return as repatriation or seeking out the capital gains in depressed assets.
How long will this particular Aussie weight continue? Until concerns about European stability return. Yet, at that point, we will likely find a broader sense of risk aversion, which will also direct funds away from Australia. It will seek out a more robust safe haven in that case: such as the US dollar.
